Brazil’s Economic Health in Check

By Bruno De Nicola, Contributing Reporter

RIO DE JANEIRO – Brazil’s Finance Minister, Guido Mantega, announced Brazil’s fall into recession just last month, yet the foreign press continues to expound positively on the country’s well being. A closer look at current and past trends in Brazil’s financial health may provide an explanation for the gap between national and international reporting, offering perspective and insight on the economic situation for Gringoes.

Rapid and erratic increases in inflation have long been a problem for Latin American countries. Any Brazilian adult can recall a not so distant past when grocery prices rose drastically from one day to the next. Prior to Lula’s first government (2002), the inflation index reached the inexcusable rate of 41 percent. Currently, according to the FGV (Fundação Getulio Vargas), one of the country’s main economic authorities, variation over the past twelve months has been steady at 4.86%.

It is important to note that this index is drawn from a selection of products. The so called IPC (Index of Large Consumption Products) does not include a few widely consumed goods which have prices that have risen steeply of late. Among them are milk and meat, which have seen increases of 13.65 percent and 10.48 percent, respectively.

Through costly measures and great sacrifices from the medium and small business sectors, Lula’s government has managed to retain money circulation, lower inflation rates and, impressively, pay all debts to the IMF (International Monetary Fund).

Brazil’s interest rate, also known as Selic, was set at nineteen percent, and has slowly been lowered over the years. As a comparison, the cost of money in Europe and the US is much lower, usually around one to three percent.

Over the past few years, the best investments in the country were Brazilian National Bonds. In 2004, lending US$100,000 to the government yielded a healthy ROI (return on investment) of US$19,000, after just one year.

A number of foreign papers reckon that high interest rates still favor Brazil, as in times of recession they give the government room to make reforms without damaging the economy. In fact, as a preventive measure, the Selic was lowered just last week to 9.25 percent, hitting a one-digit figure for the first time in many years. Nevertheless saving accounts and National Bonds still represent a safe and fruitful investment option.

Large international firms and investment funds have always considered National Bonds in Latin America to be very risky business solutions. They have historically relied on the analyses of Risco País (Country Risk Index) when making investment decisions in the region.

Country risk, also known as EMBI+ (Emergent Markets Bond Index), refers to the likelihood that changes in the business environment will adversely affect operating profits or the value of assets in a specific country. Its level is determined by financial and political stability factors.

A look at the coefficient’s long term trend may further clarify Minister Mantega’s point of view. In 2002, Brazil was a scary place, with an EMBI+ hovering at 2443 points. After Lula’s first mandate (2002-2006), stability and growth reduced the figure to 277, its lowest ever. However over the past year there has been a reverse in trend, and the country risk reached 360, but this month its back to its normal flux and stands at 304.

Brazil is holding its own economically, especially compared to some of its Latin American neighbors. Argentina is billowing at 1043, while Ecuador stands at 974 and Venezuela sits at 951. It has a lot of catching up to do to reach more stable economies in the region, such as Mexico (279) and Columbia (135), however. Still, it is performing well compared to its antecedents across the Atlantic pond, as according to JP Morgan, the Europe spread of the index has fluctuated between 385 and 415 in the past month.